Pricing Goods in an Era of Web Shopping

Stores still can't seem to wean shoppers off profit-busting discounts. But they're trying to with varying success.

It's a big challenge as shoppers find it easy to grab lower prices by simply checking on their mobile phones. In clothing, the competition in price will only get fiercer as online leader Amazon quietly builds its own store label brands.

Rafi Mohammed, Ph.D., is the founder of Culture of Profit LLC, a Cambridge, Massachusetts, consulting firm that helps businesses develop and improve pricing strategies. He says those who don't have a powerful brand like Apple need to do things like come up with unique merchandise that isn't offered on the Web. But he also believes shoppers are being tricked into thinking they're getting a good deal by the prevalence of reference prices. It's the manufacturer's suggested retail price that makes no pledge to represent the fair market value. He says retailers should include additional information like the lowest price to date.

Can stores ever wean off shoppers from discounts?

Customers are addicted to getting a good value, not necessarily discounts. If sellers can prove they are providing good value to customers - which is challenging to do - they don't need to aggressively discount. Strong brands, such as Apple, advertise and innovate to build value in consumers' minds - and as a result, discounting is not a key strategy. Costco conveys value to customers via its pledge to not mark-up product prices by more than 15 percent.

Who has been successful in scaling back discounts?

American Eagle succeeded. It focused on improving quality, for instance, adding stretch to its jeans. Men's Wearhouse scaled back discounts at its Jos. A. Bank stores. This move was a disaster simply because Jos. A. Bank is primarily known for its outrageous and constant pricing promotions, not the quality of its clothes.

Retailers have complained they lack pricing power, particularly in apparel. Why?

Three reasons. Brands have repeatedly discounted in the past, thus devalued in the mind of customers. Millennials value brands less. They favor individualism. Competition has increased. Amazon entering with its own private label clothing brands won't help matters either.

How should stores compete with online retailers?

Brick and mortar stores have two real alternatives: Charge different prices on the Web and flex their Web prices as rival Web retailers do. Sell unique merchandise that is not available on the Web.

What's the big deal with the prevalence of misleading reference prices?

Manufacturers and retailers can set whatever reference prices they want. In the kindest light, these are aspirational prices to sell their products at. The problem occurs when retailers use reference prices as a comparison to their current selling price - with the intent of implying to consumers they are getting a good deal. This comparison is only meaningful when reference prices reflect the true market value. It's misleading to purposefully inflate a reference price to trick customers into believing they're getting a bargain.

Some reference price comparisons, of course, are legitimate. But the bottom line: There isn't much current value in reference price comparisons except to confuse or trick customers.

What should be done?

Much like listing calorie counts at restaurants, meaningful information on price tags can be helpful to consumers in making purchasing decisions. In addition to the reference price and current price, retailers can add either: Lowest price offered to date or last date the product sold at the reference price for a significant period, like two weeks.